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British Virgin Islands
Many diamond groups include a company or two incorporated in the British Virgin Islands, (BVI), so this first of two articles provides more information about this tax jurisdiction.
The Virgin Islands were discovered in 1493 by Christopher Columbus, who named them 'Las Virgenes' in honour of St Ursula and her company of eleven thousand maidens. They were settled by the Dutch in 1648 and then annexed by the English in 1672. The islands were part of the British colony of the Leeward Islands from 1872-1960; they were granted autonomy in 1967. The economy is closely tied to the larger and more populous US Virgin Islands to the west; the US dollar is the legal currency.
The 23,500 inhabitants’ main income is from tourism and financial services and its GDP per capita is $38.500. The main language spoken is English and the legal system is based on the English common law system and most of the company and tax law is anchored in the Business Companies Act of 2004. The BVI introduced its outstandingly successful International Business Company (IBC) in 1984, and by the time the Act was superseded by the BVI Business Companies Act 2004, which effectively removed the distinction between 'offshore' and 'onshore' companies, well over 600,000 had registered in the jurisdiction, Hong Kong and Latin America being the main sources of clients. The basics for BVI companies are:
Money Laundering The BVI authorities decided not to encourage offshore banks to establish themselves in large numbers, as a defence against money-laundering. Unlike Bermuda, however, which created local banks to the exclusion of external banks, the BVI authorities allowed in a small number of international banks. There are in fact a total of 9 banks in the BVI, including Barclays Bank and ABN Amro. Lately there has been pressure on the Government from the business community to allow in larger numbers of respectable offshore banks; professional firms in particular feel that the BVI's legislative and regulatory apparatus is well up to global standards and well able to defend the BVI and its good reputation against scams, criminals and drug money. Banks are regulated under the Banks and Trust Companies Act 1990, and supervised by the Banking and Fiduciary Division of the Financial Services Commission. Tax Haven The British Virgin Islands was among 35 jurisdictions identified by the OECD in June 2000 as meeting the technical criteria for being a tax haven. As a result of having implemented an improvement in the transparency of its tax and regulatory systems and established effective exchange of information for tax matters with OECD countries in December 2005 , the British Virgin Islands are no longer included in the ORCD’s list of unco-operative tax havens.
Onshore Trading Company that are resident for tax purposes on the BVI pay income tax of 15%. If they are offshore, but part of the revenues are generated onshore, or if profits are remitted to the BVI then they are also liable at a rate of 15% which keeps it out of the OECD tax haven definition. There are no withholding taxes except that like other British 'dependent territories', the BVI was forced to apply the EU's Savings Tax Directive from 1st July, 2005, and chose to apply a withholding tax (initially of 15%) to the returns on savings paid to nationals of EU Member States. The Directive does not apply to corporate entities Offshore Trading A BVI company can be used to for any legitimate trading activity, including diamonds. Where transactions are between members of diamond bourses that belong to the World Federation of Diamond Bourses, the personal liability cannot be avoided by using a BVI company. There may also be difficulties in obtaining diamond trading and Kimberley licenses in countries like Israel for a BVI company. Tax Uses Where BVI companies come into their own is in international tax structures. Because they are not required to submit any financial information to the local BVI authorities and are do not have to undergo an annual audit, they well suited to tax efficient trading activities. If a BVI company is part of a DTC sightholder group it has to be audited, however, one is not limited to the jurisdiction of the auditor and can select an auditor anywhere in the world. BVI companies are often used for bringing in capital into a group structure. A very effective use is as a buffer between the source of funds and the recipient where for commercial reasons, a degree of anonymity is required. Double Taxation The BVI has double taxation treaties with UK, Japan and Switzerland. The limited number of treaties results from the small amount of onshore trading and tax payments Disadvantages It is the advantages of a BVI company that are its disadvantages. Whenever a regulatory authority sees a BVI company the question arises of ‘what are they trying to hide?’ and should be used cautiously.
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